IFRS
First Impressions:
Consolidation relief
for investment
funds
November 2012
kpmg.com/ifrs
Contents
Green light for fair value accounting 1
1. Highlights 2
2. How this could affect you 3
3. A two-stage approach 4
4. Essential elements of the definition – Always to
be met 5
4.1 Investment management services 5
4.2 Returns solely from capital appreciation and/or
investment income 5
4.3 Measure and evaluate performance on a fair
value basis 9
4.4 Applying the definition – Example 11
5. Typical characteristics may trigger disclosure 12
6. Parents of investment entities 14
6.1 Parent is an investment entity – Fair value
accounting mandatory 14
6.2 Parent is not an investment entity – Exception
not carried through 15
7. Fair value measurement question remains 18
8. New disclosures required 20
9. Changes in status accounted for prospectively 22
9.1 Qualifying for the first time 22
9.2 Ceasing to qualify 23

10. Effective date and transition 25
11. IFRS compared to US GAAP 27
About this publication 28
Contacts 31
First Impressions: Consolidation relief for investment funds | 1
© 2012 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved.
Green light for fair value accounting
This consolidation exception for investment funds is a big step by the IASB in aligning external financial
reporting with the way in which investment funds operate. Investment funds have long sought relief
from consolidation, and the IASB has responded with an industry-specific solution. It requires qualifying
investment entities to recognise their investments in controlled entities in a single line item in the
statement of financial position, measured at fair value through profit or loss. This is a significant, positive
change compared with the previous position in IFRS.
Many in the funds industry will welcome these amendments. However, the decision that a parent that is
not an investment entity will still be required to consolidate all subsidiaries may be less welcome. Parent
entities of an investment entity that are less likely to qualify as investment entities under the definition
include many banks, insurers and some investment managers.
Although this change could encourage qualifying investment funds to switch to IFRS, we watch with
interest to see how the IASB tackles a key remaining question: the basis on which to measure the fair
value of investments held by an investment fund. In particular, can the fair value of a controlling stake in a
company include a control premium? If not, then enthusiasm for fair value accounting is likely to diminish.
As we go to print, it is expected that the question will be debated by the IFRS Interpretations Committee
early in 2013.
We hope that this publication helps you to better understand the amendments, and whether your
organisation qualifies as an investment entity.
Tom Brown Robert Ohrenstein
KPMG global head of Investment Management KPMG global head of Private Equity Funds
2 | First Impressions: Consolidation relief for investment funds
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1. Highlights

●
On 31 October 2012, the IASB published Investment Entities (Amendments to IFRS 10, IFRS 12 and
IAS27). The IASB has acknowledged that this industry-specific amendment deviates from its usual
policy of focusing on the substance of transactions and avoiding industry-specific requirements;
however, it believes that in this instance the sector approach could bring multiple benefits, and might
see more investment funds adopting IFRS, given the choice.
●
A qualifying investment entity is required to account for investments in controlled entities – as well
as investments in associates and joint ventures – at fair value through profit or loss (FVTPL); the
only exception would be subsidiaries that are considered an extension of the investment entity’s
investing activities. The consolidation exception is mandatory – not optional.
●
To qualify, an entity is required to meet the following tests:
– the entity obtains funds from one or more investors to provide those investors with investment
management services;
– the entity commits to its investors that its business purpose is to invest for returns solely from
capital appreciation and/or investment income. Investment-related services provided to
investors are not prohibited, but some services to investees are restricted and some relationships
and transactions with investees are prohibited; and
– the entity measures and evaluates the performance of substantially all investments on a fair value
basis.
●
In addition, an investment entity ‘typically’ has:
– more than one investment;
– more than one investor;
– investors that are not related parties; and
– ownership interests in the form of equity or similar interests.
●
To the extent that an investment entity does not have these four characteristics, it is required to
disclose the significant judgements and assumptions made in concluding that it is an investment

entity.
●
The parent of an investment entity (that is not itself an investment entity) is still required to
consolidate all subsidiaries.
●
New disclosures include quantitative data about the investment entity’s exposure to risks arising
from its unconsolidated subsidiaries – i.e. the disclosures now apply to the investee as a single
investment rather than to the consolidated investee’s underlying financial assets and financial
liabilities.
●
The amendments apply to annual periods beginning on or after 1January 2014. However, early
adoption is permitted, which means that a qualifying investment entity might be able to adopt the
amendments as early as 31December 2012.
First Impressions: Consolidation relief for investment funds | 3
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2. How this could affect you
●
Judgement required in assessing qualifying criteria. Most conventional fund structures are
expected to meet the investment entity definition and have the typical characteristics. However, a
minority of structures – e.g. some private equity funds – will need to apply significant judgement
during the assessment process.
●
Fair value accounting for associates and joint ventures also required. To qualify as an investment
entity, an entity is required to account for investments in associates and joint ventures at FVTPL. For
venture capital and similar organisations that in any event
do not qualify as investment entities, the exemption from
equity accounting remains optional.
●
Investment entity exception for a qualifying
parent is mandatory – not optional. Some entities

might qualify as investment entities but would rather
consolidate controlled investees – e.g. some feeder
funds in a master-feeder structure. However, because
the consolidation exception is mandatory, such entities
cannot consolidate in their financial statements. Instead,
the removal of the requirement to consolidate presents
an opportunity to rethink the reporting of financial
information to investors – e.g. an investment entity may
wish to adopt a more integrated reporting approach, or
to present additional supplementary information.
●
Consolidation exception is not extended
to a parent entity that does not qualify. The
consolidation exception is not carried through to the consolidated financial statements of a parent
that is not itself an investment entity. Therefore, in many cases the cost saving will be lost because
consolidation will still be required, just at a higher level.
●
Fair value measurement question remains. There is no guidance on the basis on which to measure
fair value – e.g. whether an investment entity should measure its investment in a controlled investee
on the basis of the value of an individual share (unit), or whether a control premium should be
included in the valuation. The IFRS Interpretations Committee is expected to consider the issue in the
near future and investment funds should monitor the discussions closely.
●
Additional disclosures required. The most important disclosure implications are likely to be
the application of IFRS7 Financial Instruments: Disclosures at the investee level. Previously the
disclosures applied to the consolidated investee’s underlying financial assets and financial liabilities.
●
Adoption is imminent. If an investment entity wants to take advantage of the amendments at the
end of its current reporting period (perhaps as early as 31December 2012), then it has only a short
period in which to analyse the amendments and determine the changes in its reporting to investors

and other stakeholders.
●
A broad impact is expected across the financial services sector. Mutual and hedge funds are
generally expected to be able to take advantage of the consolidation exception. Private equity funds
are also likely to qualify, and were a key focus of the IASB in approving the consolidation exception.
The more passive real estate funds might qualify – the focus is likely to be on the business purpose
and fair value measurement and performance evaluation tests.
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3. A two-stage approach
To qualify as an investment entity, an entity needs to consider all facts and circumstances, including
its purpose and design. The amendments include a definition of an investment entity and provide
typical characteristics that an investment entity is expected to display; we refer to this as the ‘two-
stage approach’ in this publication. The diagram below is a general presentation of the model used to
determine whether an entity qualifies as an investment entity.

Are of the essential elements
of the definition met?
all
Investment management services (see 4.1)
Returns solely from capital appreciation and/or
investment income (see 4.2)
Measure and evaluate performance on a fair
value basis (see 4.3)
Are of the typical characteristics present?
all
More than one investment
More than one investor
Investors are not related parties of the entity
Ownership interests in the form of equity or

similar interests
(See Section 5)
Ye s
Stage one
Stage two
Entity is an investment entity,
and controlled investees are consolidated
not
Does
management
judge that the
entity is
nevertheless an
investment
entity?
Disclosures about
management’s
judgement
required
(see Section 8)
Ye s
Entity is an investment entity, and controlled investees are accounted
for at FVTPL with one exception (see 4.2.2)
Ye s
No No
No
First Impressions: Consolidation relief for investment funds | 5
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4. Essential elements of the definition –
Always to be met

IFRS 10.27, B85A
An entity needs to meet all of the essential elements of the definition of an investment entity to qualify
for the consolidation exception. In making this determination, management is required to consider all
facts and circumstances, including the purpose and design of the entity.
4.1 Investment management services

Investment management
services
+
Returns solely from
capital appreciation and/or
investment income
Measure and evaluate
performance on a
fair value basis
+
IFRS 10.27(a), BC237 An investment entity obtains funds from investors to provide those investors with investment
management services. The IASB believes that providing these services is necessary, though not on
its own sufficient, to distinguish an investment entity from other types of entities. There is no further
application guidance in the amendments regarding this particular requirement, but the second element
of the definition includes guidance that permits certain investment-related services (see 4.2.2).
4.2 Returns solely from capital appreciation and/or
investment income

Investment management
services
Returns solely from
capital appreciation and/or
investment income
++

Measure and evaluate
performance on a
fair value basis
IFRS 10.27(b), B85B An investment entity commits to its investors that its business purpose is to invest for returns solely
from capital appreciation and/or investment income. This commitment could, for example, be included in
the offering memorandum, investor communications and/or other corporate or partnership documents.
The investment plans of the entity provide evidence of its business purpose – i.e. an investment entity
does not plan to hold its investments indefinitely (see 4.2.1).
IFRS 10.B85C–B85D, In addition, the amendments provide guidance on the types of relationships, transactions and services
B85I–B85J that are prohibited or permitted (see 4.2.2).
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4.2.1 Potential exit strategies to be documented
IFRS 10.B85F, BC245
A documented potential exit strategy is required for substantially all investments that could be held
indefinitely. The table below provides examples of instruments for which an exit strategy is required

/
not required

.
Investment Exit strategy required?
Equity investments

Investment property

Debt instruments with a set maturity

Perpetual debt instruments


Insight – Indefinite-lived instruments
IFRS 10.B85F, BC247 The test of whether an investment could be held indefinitely is a question of fact. For example, an
instrument that has an equity conversion feature, exercisable at the option of either the issuer or the
holder, could be held indefinitely. This is because the conversion option means that the instrument
could have an indefinite life (if it is converted).
IFRS 10.B85F–B85G A potential exit strategy is not required for each investment, but rather for each type or portfolio of
investments. The following are examples of exit strategies for financial and non-financial investments.
Debt securities Equity investments Investment property
●
Private placement
●
Converting debt to equity
with subsequent sale
●
Initial public offering
●
Private placement
●
Distributions of ownership
interests
●
Sale on the open market
●
Private placement through an
agent
IFRS 10.B85F Exit strategies that are put in place only for default events – such as breach of contract or non-
performance – are not considered exit strategies for the purposes of this assessment.
IFRS 10.B85H, BC248 The feeder fund in a master-feeder structure does not itself require a potential exit strategy for its
investment in the master fund. However, the master fund does require a potential exit strategy for all of
its investments that could be held indefinitely.

Insight – Change in investment strategy
IFRS 10.29
In continuing to qualify as an investment entity, the amendments do not rule out a change in the detail
of a fund’s investment strategy, as long as the entity’s business purpose is still to obtain returns solely
from capital appreciation and/or investment income and it continues to have potential exit strategies.
First Impressions: Consolidation relief for investment funds | 7
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4.2.2 Relationships, transactions and services
The amendments include specific guidance on certain relationships, transactions and services.

Permitted
Benefits not available
to unrelated parties
Investment entity
Certain activities with
investees
Investment-related
services to
and third parties
investors
Prohibited Restricted
Prohibited benefits
IFRS 10.B85I The standard includes the following examples of relationships and transactions that preclude an entity
from qualifying as an investment entity; this is because they indicate that the entity is investing to earn
benefits other than capital appreciation and/or investment income.
●
Acquiring, using, exchanging or exploiting intangible assets, technology or processes of an investee;
this includes exclusive or disproportionate rights to acquire assets, technology, products or services –
e.g. an option to buy an asset if its development is successful.
●

Participation as a joint controller in a joint arrangement, the purpose of which is to develop, produce,
market or provide products or services; see Chapter 3.6A of the 9
th
Edition 2012/13 of our publication
Insights into IFRS for further guidance on the concept of a joint arrangement.
●
Obtaining a guarantee or collateral from an investee over the entity’s borrowings; however, this
does not preclude an investment entity from using its investment in an investee as collateral for
borrowings.
●
A related party of the investment entity holding an option to acquire ownership interests in the
investee from the entity.
●
Other transactions:
– with terms that are not available to investors that are not related parties;
– that are not at fair value; or
– that represent a significant portion of the business activities of the investee.
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IFRS 10.B85I, B85J,
The above restrictions cover not only the entity itself, but also any member of the larger group of
BC242 which it is a part – i.e. any subsidiary of the entity’s ultimate parent. However, merely because investees
trade with each other does not preclude an entity from qualifying as an investment entity. The IASB
incorporated these restrictions into the amendments to avoid abuse – e.g. to ensure that an entity did
not seek to establish an investment entity subsidiary within a corporate structure that would be used to
hold loss-making subsidiaries.
The following example is derived from the illustrative examples published with, but not forming an
integral part of, the amendments.
Example – Option held by related party
IFRS 10.IE7–IE8 Scenario

●
High-technology Fund (HT) was formed by Technology Corporation (TC) to
invest in technology start-up companies for capital appreciation.
●
TC has a 70% ownership interest in HT. The remaining 30% is owned by
10 unrelated investors.
●
TC holds an option to acquire the investments held by HT at their fair
value, if the underlying technology would benefit the operations of TC.
Analysis HT does not qualify as an investment entity, because the option held by
TC provides a benefit in addition to capital appreciation and/or investment
income.
Permitted services to investors
IFRS 10.B85C, BC239 As part of its activities, an investment entity is permitted to provide investment-related services
to investors. Such services could include, for example, investment advisory services, investment
management, investment support and administrative services. Even if the investment-related services
are substantial and are also provided to third parties, this does not preclude an entity from qualifying as
an investment entity. The IASB agreed with arguments that such services are simply an extension of an
investment entity’s investing activities.
Restricted activities with investees
IFRS 10.B85D, BC241 However, providing management services or strategic advice to the investee, or providing financial
support to the investee – e.g. through a loan, capital commitment or guarantee – is prohibited, unless
these activities:
●
do not represent a substantial business activity or a separate substantial source of income of the
entity; and
●
are undertaken to maximise the investment return from the investee.
Insight – Private equity funds set to be the major beneficiaries
The decision to allow investment-related services was a result of late redeliberations by the IASB, and

was intended to benefit private equity funds. Although management will need to exercise judgement,
specifically when restricted activities are performed, there is an expectation that such funds will often
qualify as investment entities.
First Impressions: Consolidation relief for investment funds | 9
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IFRS 10.32, B85C, B85E
Permitted investment-related services may be provided directly or through a subsidiary. As shown in the
diagram below, subsidiaries providing such services will be consolidated.

Other controlled investees
Investment entity
Controlled investees
providing investment-
related services
Consolidated
FVTPL
4.3 Measure and evaluate performance on a fair value
basis

Returns solely from
capital appreciation and/or
investment income
++
Investment management
services
Measure and evaluate
performance on a
fair value basis
IFRS 10.27(c), B85K The final element of the definition of an investment entity is the measurement and performance
evaluation of ‘substantially all’ investments on a fair value basis. Meeting this requirement indicates that

fair value is the primary driver of the decision-making process for both management and investors.
IFRS 10.B85K–B85L To meet these requirements:
●
in all instances permitted by IFRS, investments should be accounted for under the fair value model,
including the following requirements:
– investment property should be measured at fair value under IAS40 Investment Property;
– financial assets should be measured at fair value under IFRS 9 Financial Instruments, or to the
extent possible under IAS 39 Financial Instruments: Recognition and Measurement; and
– investments in associates and joint ventures should be measured at fair value under IAS28 (2011)
Investments in Associates and Joint Ventures (see also Section 6); and
●
fair value information should be used by key management personnel as the primary attribute in
evaluating the performance of investees and in making investment decisions.
IFRS 10.BC251 The recognition of changes in fair value in other comprehensive income (OCI) does not preclude an
entity from qualifying as an investment entity – e.g. available-for-sale financial assets under IAS39.
IFRS 10.B85M An entity that accounts for a more than insignificant portion of its investment under a cost model will
not qualify as an investment entity. However, non-investment assets – e.g. own-use property and
equipment under IAS16 Property, Plant and Equipment – and financial liabilities need not be measured
at fair value.
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Insight – Judgement required in assessing ‘substantially all’
IAS 40.53
There is no specific guidance on the threshold required for an entity to conclude that it measures and
evaluates the performance of ‘substantially all’ investments on a fair value basis, and management
will need to use its judgement. For example, an entity may account for investment property under the
fair value model, but within that model some properties might be accounted for under the cost model
because fair value cannot be determined reliably. In that case, the entity will assess the extent of its
investment property accounted for under the cost model to determine if the ‘substantially all’ test is
met.



Insight – Fair value accounting for venture capitalists maintained
The August 2011 exposure draft that preceded the amendments proposed that only investment
entities should account for investments in associates and joint ventures at FVTPL. This would have
meant that the exemption from equity accounting would have been lost for venture capital and similar
organisations that do not qualify as investment entities. However, in response to comments from
constituents, the IASB decided to retain the exemption.
As a result, the measurement exemption in IAS28 (2011) applies as follows.
IFRS10.B85L(b)
●
As noted above, an investment entity is required to elect to measure investments in associates and
joint ventures at FVTPL.
IAS 28 (2011).18–19
●
A venture capital or similar organisation that does not qualify as an investment entity may choose to
measure all of its investments in associates and joint ventures at FVTPL.
Insight – Debt funds may seek investment entity status
In our experience, debt funds do not typically measure investments on a fair value basis and therefore
would not qualify as investment entities. In many cases, this would not be relevant because the fund
would not take a controlling stake in an investee.
However, in certain situations following a financial restructuring, a debt fund may take a controlling
equity stake, which may result in the requirement to consolidate the underlying investee; this is
because the fund may still have debt investments that are measured on an amortised cost basis. For
this reason, following the amendments, qualification as an investment entity may form part of the
impact analysis on the restructuring of a debt fund.
First Impressions: Consolidation relief for investment funds | 11
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4.4 Applying the definition – Example


The following example is derived from the illustrative examples published with, but not forming an
integral part of, the amendments.
IFRS 10.IE9–IE11
Scenario
●
A Real Estate Fund (REF) develops, owns and operates retail, office and
other commercial property through its wholly owned subsidiaries, each
holding a separate property.
●
Property investments held within the subsidiaries are accounted for by
REF and each of its subsidiaries at fair value under IAS 40.
●
REF does not have a set timeframe for disposing of its property
investments, but uses fair value to identify the optimal time for disposal.
REF and its investors also consider other factors (e.g. expected cash flows)
in making their decisions.
●
Although fair value is a key performance indicator, key management
personnel do not consider it a key attribute in assessing performance.
●
REF undertakes property and asset management activities, including
property management, capital expenditure and tenant selection, which it
outsources to third parties. These are a substantial part of REF’s business.
Analysis REF does not qualify as an investment entity for any of the following
reasons – i.e. any one of the following precludes REF from qualifying as an
investment entity.
●
REF has a separate substantial business activity (property and asset
management) – i.e. its activities go too far beyond earning returns from
capital appreciation and/or investment income (see 4.2.2).

●
REF does not have exit strategies for its investments in real estate
(see4.2.1).
●
Fair value is one of the performance indicators used by REF. However, it is
not the primary attribute used by key management personnel in evaluating
performance and making investment decisions (see 4.3).
Insight The wording of the illustrative example on real estate funds suggests that
the IASB intends very few real estate funds to qualify as investment entities.
In our experience, real estate funds may be involved in construction or
redevelopment, and it is common for them to be involved in operations.
Judgement is required to evaluate, using the facts and circumstances for
each case, whether these activities are substantial business activities.
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5. Typical characteristics may trigger
disclosure
IFRS 10.28, BC255
The IASB expects an entity that meets the definition of an investment entity to typically have the
characteristics summarised in the table below.
IFRS 10.B85N The absence of one or more of these typical characteristics does not immediately disqualify an entity
from being classified as an investment entity – i.e. it is possible for an entity to have none of these
characteristics and still qualify as an investment entity. However, in such cases additional judgement is
required by management in determining whether the entity qualifies.
The
investment
entity: Comments
IFRS 10.B85O–B85P
Holds more
than one

investment
●
Generally, an investment entity is expected to hold multiple investments in
order to diversify its risks and maximise returns. However, the amendments
acknowledge that this may not always be the case.
●
An investment entity might hold a single investment in the following situations,
for example:
–
a start-up or wind-up period; or
–
when its purpose and design is to provide investors with access to an
investment that they wouldn’t otherwise have access to – e.g. a feeder fund or
because the entry price is too high.
IFRS 10.B85Q–B85S
Has more than
one investor
●
An investment entity is generally expected to have multiple investors. The IASB
believes that this means that the entity (or entities in the same group) is less
likely to earn returns other than capital appreciation and/or investment income
(see4.2).
●
However, the amendments acknowledge that in some cases a single investor is
entirely credible. For example, a pension fund, government investment fund or
family trust might be a single investor, representing a wider group of investors.
Alternatively, there might be a single feeder fund in a master-feeder structure.
●
Sometimes a single investor will be temporary – e.g. in the investment entity’s
start-up or wind-up period.

IFRS 10.B85T–B85U
Has investors
that are not
related parties
●
Another typical characteristic of an investment entity is having investors that
are not related parties (as defined in IAS 24 Related Party Disclosures). Again,
the IASB believes that this makes it less likely that the entity (or entities in the
same group) is earning returns other than capital appreciation and/or investment
income (see4.2).
●
However, the amendments provide the example of a fund set up for members
of key management personnel that mirrors the investments of the entity’s main
investment fund. Such an arrangement does not preclude investment entity
status.
First Impressions: Consolidation relief for investment funds | 13
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The
investment
entity: Comments
IFRS 10.B85V–B85W
Has ownership
interests in the
form of equity
or similar
interests
●
An investment entity is not required to be a legal entity, which means that the
beneficial interests in the entity will not necessarily be in the form of equity or
similar interests.

●
Each unit of ownership in an investment entity typically represents a specifically
identifiable proportionate share in its net assets. However, it is also acceptable
for an investment entity to have multiple classes of investors with separate
investment pools per class or different proportionate shares of net assets or
differential rights in the proportionate share of net assets – e.g. in a waterfall
structure.
●
An investment entity may have significant ownership interests that are classified
as liabilities under IAS32 Financial Instruments: Presentation, as long as debt
holders are exposed to variable returns from changes in the fair value of the
entity’s net assets.
Insight – No specific criteria in assessing characteristics
The IASB adopted the two-stage approach in response to criticism of the more bright-line approach that
was included in the August 2011 exposure draft that preceded the amendments. For this reason, the
amendments do not provide specific criteria that management should consider in assessing whether
an entity qualifies as an investment entity despite failing one or more of the typical characteristics.
However, the basis for conclusions notes that the IASB believes that only in rare circumstances would
an investment entity have none of the typical characteristics.
IFRS 12.9A An investment entity is required to disclose its reasons for concluding that it is nevertheless an
investment entity when one or more of these characteristics is not met.
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6. Parents of investment entities
6.1 Parent is an investment entity – Fair value
accounting mandatory
IFRS 10.33
The investment entity consolidation exception is mandatory for the parent of an investment entity that
itself meets the definition of an investment entity. This means that the parent of an investment entity is
required to account for its investments in controlled investees at FVTPL, even if the investment entity

subsidiary was formed for specific regulatory, legal or tax purposes – e.g. in a master-feeder structure.
IFRS 10.B85L(b) In addition, because the parent is an investment entity, any investments in associates and joint ventures
are required to be accounted for at FVTPL (see 4.3).

Controlled investees
providing investment-
related services
Parent
(investment entity)
Associates and
joint ventures
Other controlled investees
Consolidated
FVTPL
IFRS 10.BC272– Despite feedback on the August 2011 exposure draft that certain respondents saw more benefits from
BC273 reporting on a consolidated basis, the IASB decided against such an approach. Its reasoning was that no
conceptual basis exists for distinguishing between different investment entity subsidiaries. An additional
complication would arise from trying to distinguish investment entity subsidiaries formed for regulatory,
legal or tax purposes from those that were not.
Insight – Financial reporting of master-feeder structures
Master-feeder structures, which are generally expected to fall within the definition of an investment
entity, often seek to present to investors information about the underlying investments of the
master fund – therefore, they may prefer to consolidate. Understandably, it is essential for users of
the feeder fund’s financial statements to have information about the underlying investments of the
master fund.
As one possible solution, some constituents suggested introducing a requirement to append
subsidiaries’ financial statements to the parent’s financial statements. The IASB rejected this solution
as a requirement, but IFRS12 Disclosure of Interests in Other Entities explicitly acknowledges that
the financial statements could be attached (see Section8). Alternatively, feeder funds can consider
whether to present consolidated financial statements, or information on a proportionate consolidation

basis, as supplementary information.
First Impressions: Consolidation relief for investment funds | 15
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6.2 Parent is not an investment entity – Exception not
carried through
IFRS 10.33, BC275
The consolidation exception is not carried through to the consolidated financial statements of a parent
that is not itself an investment entity – i.e. the parent is nevertheless required to consolidate all
subsidiaries.

Parent
(not investment entity)
Controlled investees
Investment fund
(investment entity)
Investment fund accounts
for controlled investees at
FVTPL in its financial
statements
Parent consolidates controlled investees
all
IFRS 10.BC277– The majority of respondents to the August 2011 exposure draft disagreed with this proposal.
BC278 However, the IASB decided to retain the proposal, because a key factor in granting the consolidation
exception in the first place was the unique business model of investment entities, which the higher-
level parent may or may not have.
IFRS 10.BC242 The IASB is also concerned that an ‘internal’ investment entity could be misused in a larger corporate
structure – e.g. a manufacturing group – to achieve a particular accounting outcome. The basis for
conclusions gives the example of a group that uses an internal investment entity to record investments
in loss-making activities within the group – e.g. the group’s research and development activities –
to avoid consolidating those activities. Such an internal investment entity would not qualify for the

exception, because benefits are obtained from investees that are unavailable to other investors
(see4.2.2).
Insight – Potentially broad consequences
Although many investment entities will have a parent that is an investment entity – which means that
the exception will be carried through – in our experience, some will have a parent that is a non-qualifying
bank or an insurance company or another non-investment entity. Also, situations may arise in which the
investment manager will control the investment fund under IFRS 10 Consolidated Financial Statements
– see our publication
IFRS Practice Issues: Applying the consolidation model to fund managers – and
will therefore be required to consolidate all of the subsidiaries of the investment fund accounted for by
the fund at fair value. In such situations, any cost saving will be lost because consolidation will still be
required, but at a higher level.
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IAS 28 (2011).18–19
Even if the parent is not an investment entity, any investments in associates and joint ventures held
through the investment-entity subsidiary may be accounted for at FVTPL – i.e. the parent (investor) has
an accounting policy choice.
Insight – Associates and joint ventures treated differently from subsidiaries
IFRS 10.BC283
The IASB has acknowledged the inconsistency between the treatment of associates and joint ventures
(fair value accounting may be carried through) and the treatment of controlled investees (fair value
accounting cannot be carried through). However, the IASB thought that it was important to keep the
carry-through of the existing fair value measurement exemption for parents of venture capital and
similar organisations, which would otherwise be required to commence equity accounting.

Associates and
joint ventures
FVTPL or equity account
Controlled investees

providing investment-
related services
Parent
(not investment entity)*
Associates and
joint ventures
Other controlled investees
Investment fund
(investment entity)
Equity account
* In this example, the parent itself does not qualify as a venture capitalist or similar organisation, and therefore direct holdings in
associates and joint ventures are equity accounted.
Consolidated
Insight – Potential differences with US GAAP
The FASB is currently finalising its deliberations on amended accounting requirements for entities that
qualify as investment companies. The FASB’s Accounting Standards Update, which is expected to be
issued in the first half of 2013, is expected to differ from the IFRS proposals in two key respects.
●
Unlike IFRS, the FASB is expected to permit certain investment company parents to consolidate
their investment company subsidiaries.
●
Unlike IFRS, the FASB is expected to require a non-investment company parent to retain the
investment company’s accounting at the group level.
See Section 11 for further differences expected.
First Impressions: Consolidation relief for investment funds | 17
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Example – Split holding
A parent of an investment entity that is not an investment entity has an indirect interest in an investee.
●
Parent P (which is not an investment entity) has two investment entity subsidiaries, S1 and S2.

●
S1 and S2 each have significant influence in Company C, and account for their respective
investments at FVTPL (see4.3).
●
At the consolidated level, P controls C through its 51% holdings in S1 and S2.
51%
Subsidiary S2
(investment entity)
Company C
Parent P
(not investment entity)
Subsidiary S1
(investment entity)
51%
30% 30%
IFRS10.33
In this example, P would consolidate C. This is on the basis that IFRS10 requires a non-investment
entity parent to consolidate all subsidiaries – i.e. both direct and indirect.
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7. Fair value measurement question
remains
IFRS 13.A In measuring fair value, investment entities will follow the guidance in IFRS13 Fair Value Measurement,
which defines fair value as: “the price that would be received to sell an asset or paid to transfer a liability
in an orderly transaction between market participants at the measurement date”.
IFRS 13.A Market participants are independent – i.e. not related parties under IAS 24 – knowledgeable, able and
willing to enter into a transaction; however, the price in a related party transaction may be used as an
input to a fair value measurement if the fund has evidence that the transaction was entered into on
market terms.
IFRS 13.62, B5–B6, Valuation techniques used to measure fair value fall into three approaches.

B8, B11
Approach Comments
Market
approach
The market approach comprises valuation techniques that often derive market
multiples from a set of comparable assets. A market multiple expresses the value
of a business in terms of its ratio to a financial, operating or physical metric. For
example, a price-to-earnings ratio expresses an entity’s per-share value in terms of
its earnings per share. The multiple can then be applied to the metric of an entity
with similar characteristics but different scale, subject to adjustment for differences
between the entity and the selected comparable. When multiples are derived
from a number of comparable entities, there will typically be a range of multiples
calculated.
Income
approach
The income approach comprises valuation techniques that convert future amounts,
such as cash flows or income streams, to a current amount on the measurement
date. The fair value measurement reflects current market expectations about those
future amounts, discounted to their present value.
Cost approach The cost approach comprises valuation techniques that reflect the amount that
would be required to replace the service capacity of an asset. This approach is not
used for the valuation of financial assets.
IFRS 13.72 To improve consistency and comparability, IFRS13 establishes a fair value hierarchy based on the inputs
to the valuation techniques. The inputs are categorised into three levels – the highest priority is given
to unadjusted quoted prices in active markets for identical assets or liabilities, and the lowest priority is
given to unobservable inputs.
IFRS 13.76, 81, 86, A The fair value hierarchy is made up of three levels.
●
Level 1 inputs are unadjusted quoted prices in active markets for identical assets or liabilities that the
entity can access at the measurement date.

●
Level 2 inputs are inputs, other than quoted prices included within Level1, that are observable for the
asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices).
●
Level 3 inputs are unobservable inputs for the asset or liability.
See Chapter 2.4A of the 9
th
Edition 2012/13 of our publication
Insights into IFRS for further guidance on
fair value measurement.
First Impressions: Consolidation relief for investment funds | 19
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Insight – Unit of account
The ‘unit of account’ is a concept introduced by IFRS13 to define the level at which fair value is
measured. However, although IFRS 13 explicitly introduces the concept of the ‘unit of account’, it is
determined in accordance with the relevant IFRS that requires or permits the fair value measurement.
In many cases, the unit of account can be inferred. However, for a financial asset that is an investment
in a subsidiary, joint venture or associate it is not clear; this is because the investment held by the
entity comprises a number of individual shares (units).
A number of views might be possible under IFRS13, and it is not clear what the IASB intended when
the standard was issued. Two possible views are outlined below.
●
The unit of account is the entire investment. This view is based on the fact that the accounting in the
amendments is premised on the item as a whole, and not on it being a collection of smaller items.
This means, for example, that the fair value of a controlled investee will include a control premium.
●
The unit of account is the individual share. This view is based on the fact that, even if it is outside the
scope of IAS 39 / IFRS 9, the unit of account for financial assets is the individual share. This means,
for example, that the fair value of a controlled investee will be determined based on the quoted price
of the individual share and will not include a control premium. This view is especially relevant for

investment entities, because the amendments state that investments in controlled investees are
accounted for ‘in accordance with’ IAS 39 / IFRS 9.
The IASB is aware of this question, and the IFRS Interpretations Committee is expected to consider
this issue in the near fut
ure. Investment funds should monitor the discussions closely.
IFRS 10.BC225 During its deliberations, the IASB considered permitting the use of net asset value (NAV) as a practical
expedient for fair value. However, the IASB decided against it due to the different calculation methods
applied in different jurisdictions. Also, because it is a fair value measurement consideration, the area
was deemed to be outside the scope of the investment entities project.
For further guidance on key considerations when assessing whether NAV is representative of fair value
or can be used as an input into a valuation model, see our publication
IFRS for Investment Funds: Fair
value measurement of financial assets and financial liabilities (Issue 5)
.
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8. New disclosures required
IFRS 12.9A, 19A
An entity discloses the significant judgements and assumptions that it has made in determining that
it meets the definition of an investment entity. Furthermore, if an entity does not have one or more
of the typical characteristics of an investment entity (seeSection5), then it discloses its reasons for
concluding that it is nevertheless an investment entity.
IFRS12 has been amended to incorporate disclosure requirements in respect of an investment entity’s
status and interests in unconsolidated subsidiaries. These disclosures include the following.
IFRS 12.19D(b)–E
Unconsolidated subsidiaries that are not structured entities
●
Any commitment or intention to provide financial or other support to controlled investees.
●
Information about financial or other support provided, without a contractual obligation to do so,

during the reporting period; this should include the reasons for providing support.
IFRS 12.19F–G
Unconsolidated subsidiaries that are structured entities
●
Contractual arrangements that could require the investment entity or its unconsolidated subsidiaries
to provide financial support, including events or circumstances that could expose the investment
entity to loss.
●
Information about financial or other support provided, without a contractual obligation to do so,
during the reporting period; this should include an explanation of the relevant factors in deciding to
provide support.
IFRS 7.40 Before these amendments, the disclosure requirements of IFRS 7 applied to the underlying financial
assets and financial liabilities of a controlled investee (on consolidation). IFRS7 still applies, but now at
the investee level. For example, the sensitivity analysis for each type of market risk to which the entity
is exposed at the year end, showing how profit or loss and equity would have been affected by changes
in the relevant risk variable that were reasonably possible at that date, will apply at the investee level.
The fair value disclosures under IFRS 7 replace the previous disclosures required by IAS28 (2011) for
investments in associates and joint ventures. For example, there is no longer a requirement to provide
summarised financial information about such investments.
IFRS 24.4 IAS24 has been amended to clarify that related party transactions and balances between an investment
entity and its unconsolidated subsidiaries should be disclosed in the investment entity’s consolidated
financial statements.
Insight – Potential information overload
IFRS 12.19B–C
IFRS12 requires the following basic disclosures about all unconsolidated subsidiaries (i.e. including
indirect subsidiaries):
●
the name of each subsidiary;
●
its principal place of business; and

●
the ownership interest/voting rightsheld.
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When an investment entity has a subsidiary that is also an investment entity, the amendments to
IFRS 12 allow, but do not require, an investment entity to disclose this information by incorporating the
financial statements of controlled investees into its own consolidated financial statements.
Such an approach may be excessive in many cases, cluttering the financial statements so that key
disclosures become less clear for readers of the financial statements. Instead, the amendments give
management an opportunity to rethink the way in which they report to investors; this might better align
internal and external reporting.
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9. Changes in status accounted for
prospectively
IFRS 10.29
An entity reassesses its status if facts and circumstances indicate that there has been a change in
either one of:
●
the factors in the essential elements of the definition of an investment entity (seeSection4); or
●
the typical characteristics of an investment entity (seeSection5).
IFRS 10.30 Any change in status is accounted for prospectively.
Section 10 discusses changes in status as a result of adopting the amendments for the first time.
9.1 Qualifying for the first time
IFRS 10.25–26, B101 When an entity qualifies as an investment entity for the first time, it accounts for the change as a
deemed loss of control of its subsidiaries. The difference between the previous carrying amount of the
subsidiaries and their fair value at the date of the change in status is recognised as a gain or loss.
Example – Qualifying as an investment entity
IFRS 10.B98–B99 Investment Fund (IF) has consolidated Subsidiary S since its incorporation a number of years ago. IF

has a 60% holding in S. On 1June 2015, after the amendment to IFRS10 came into effect, IF meets the
criteria to qualify as an investment entity.
At 1June 2015, the following information is relevant.
●
The carrying amount of S’s net assets in IF’s consolidated financial statements is 1,000 (including
any goodwill).
●
The carrying amount of non-controlling interests (NCI) in equity is 400.
●
The fair value of IF’s 60% holding in S is 1,500.
●
A credit of 150 (net of the amount attributed to NCI) is recorded in a revaluation reserve related to S’s
offices, which are measured on a fair value basis in accordance with IAS16.
IF records the following entry at 1June 2015.
Debit Credit
Investment in S 1,500
NCI 400
Revaluation reserve (Note) 150
Retained earnings (Note) 150
Gain on deemed loss of control 900
Various assets and liabilities 1,000
IFRS 10.B99, B101,
To deconsolidate S on qualifying as an investment entity
Note
IAS16.41
The debit in the revaluation reserve is transferred directly to retained earnings, which is consistent with the treatment
that would apply if the underlying property, plant and equipment had been disposed of directly. The transfer has no
impact on the gain arising on the deemed loss of control.
First Impressions: Consolidation relief for investment funds | 23
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IFRS 12.9B
An entity that qualifies as an investment entity discloses the effect of the change of status on the
financial statements for the period presented, including:
●
the total fair value of subsidiaries that ceased to be consolidated; and
●
any gain or loss recognised as a result of the deemed loss of control, and the line item in which it is
disclosed in profit or loss.
9.2 Ceasing to qualify
IFRS 10.30, B100 When an entity ceases to qualify as an investment entity, IFRS3 Business Combinations is applied
at that date in its consolidated financial statements (the deemed acquisition date). The fair value of
controlled investees at the date of the change becomes the deemed consideration transferred to obtain
control of the investee.
Example – Ceasing to qualify as an investment entity
IFRS 10.B100 Investment Fund (IF) has been classified as an investment entity since it adopted the amendments
to IFRS10 on 1January 2013 (early adoption); accordingly, its 60% holding in Subsidiary S has been
accounted for at FVTPL.
On 1June 2015, IF determines that it no longer meets the criteria to qualify as an investment entity. At
that date, the following information is relevant.
●
The carrying amount (fair value) of IF’s investment in S is 1,500.
●
The fair value of S’s identifiable net assets is 1,000.
●
IF elects to recognise NCI based on their interest in the net identifiable assets of S (rather than at the
fair value of their shareholding). Therefore, their carrying amount at 1June 2015 would be 400 (1,000
x 40%).
IF records the following entry at 1June 2015.
Debit Credit
Identifiable net assets 1,000

Goodwill (Note) 900
NCI 400
Investment in S 1,500
IFRS3.32
To consolidate S on ceasing to qualify as an investment entity
Note
Consideration transferred 1,500
Plus NCI recognised 400
Less identifiable net assets
Goodwill
(1,000)
900